Evaluating delay, disruption and acceleration claims
The Naval Architect: November 2015
Additional cost claims from builders occur more regularly when yards are constructing ‘one-off’ vessels such as superyachts, drilling rigs, offshore construction, floating production vessels and specialist dredging and pipe-laying vessels.
This article is based on English law which is still today the most commonly chosen law for large export newbuild projects.
Shipbuilding contracts can be very procedural and the most common requirement that can cause difficulty for the shipyard is the necessity for notices in respect of claims for changes in the contract price.
The timing and the amount of detail required in notices varies from contract to contract and one should never assume that just because you are working on another SAJ, LOGIC or BIMCO NEWBUILDCON variant that the notice provisions will be the same buyers often amend the notice provisions to make it harder for builders to secure the right to recover additional cost claims.
Failure to provide requisite notices may deprive the builder of his entitlement to additional costs under the contract.
Claims for damages in common law do not require prior notification. The main reason for money claims being made as alternative common law or civil law claims is the absence of the need to serve notices at common law or civil law (sometimes simply referred to in contracts as ‘at law’). Builders often, as a consequence, turn to common law/civil law claims when they have failed to properly serve notices under the contract, but a word of caution is that these days we are seeing some contracts also making the service of a notice a condition precedent to a successful claim at law.
Basis of entitlement
Entitlement to recover additional cost exists in two forms, either as a result of the contractual rights in the express terms of the contract or by way of a claim on a common law or civil law basis.
Typical causes of additional cost suffered by builders include:
prolongation to contract programme
late information from the buyer (and his design team) for instance in respect of outfitting items such as furniture
modifications and variations to the specification by the buyer
late approval of builder’s design by the employer‘ preferential engineering’ by the buyer
late ‘free issue’ materials supplied to builder by the buyer
lost productivity occasioned by working in an additional ‘winter season’ of weather due to earlier delays caused by the buyer
loss of labour productivity due to matters such as the cumulative or ‘ripple impact’ of multiple changes and rework; direct or constructive acceleration; crowding of labour; excessive overtime; defective engineering; learning curve; out of sequence working; untimely approvals and access restrictions
accelerative measures leading to uneconomic working methods
change of availability of dry dock facilities due to delays
change to overall yard logistics due to delays
suspension due to late payment.
Heads of claim generally
In most cases the evaluation will fall into three sections, i.e. costs associated with prolongation, disruption and acceleration.
By far the easiest to consider is the cost of prolongation and below are some possible claim headings for the evaluation of prolongation or delay:
remuneration of yard management/supervisors that are not working on the actual construction work and are not a head office expense
dry dock and workshop facilities
electricity, water and telephone accounts for the delay period
additional insurance premiums
loss due to carrying out work at a time of the year involving inclement weather
attendances on subcontractors over a longer period
increased costs (inflation) of labour, plant and material where not otherwise reimbursable
profit and overheads on increased costs reimbursed during the extended period
security, safety and welfare measures during the prolonged period
head office overheads of the yard which may include a lost opportunity to earn revenue from another vessel construction due to the prolonged period of construction in the dry dock
loss of profit.
Plant, scaffolding, cranes and tools
Records should be completed weekly as a matter of course, and if possible agreed with the buyer. If the plant is hired, including hire from a sister company then the reasonable actual hire costs of such plant will apply.
In the case of the Builder’s own plant, it was held in Property and Land Contractors v Alfred McAlpine Homes North that hire rates should be applied only if the builder can prove that by reason of the delay he has been prevented from hiring his equipment out to others. In the absence of such proof the builder’s recovery is limited to depreciation, interest on the money invested, and maintenance and operators’ wages (if appropriate).
Head office overheads
Builders when putting together claims will often claim for head office overheads. The case usually put forward to support this item is that a percentage has been added at tender stage to the net estimated costs as a contribution to the cost of running the head office.
The main problem for the builder is in being able to show an entitlement in principle. The basis of claim is that because of delay caused by the buyer, the builder was deprived of the chance of earning contributions or recovering its overhead costs from the construction of other vessels in the yard.
A popular means of ‘lost opportunity’ calculation is to use the ‘Emden formula’ which has been approved in certain cases. The ‘Emden formula’ uses an overhead percentage which is taken as an average from the Builder’s audited accounts. If a formula claim for overheads is made, duplication with other heads, such as financing costs, must be abated.
A better means of recovering problem-solving costs is by diary records. In Tate & Lyle v GLC a claim for damages included 2½% added to other heads of claim to cover management costs. It was held that the time spent was a proper head of damage, but in this case nothing was proved: “While I am satisfied that this head of damage can properly be claimed … I would ... accept that it must be extremely difficult to quantify. But modern office arrangements provide for the recording of the time spent by managerial staff on particular projects.” The importance of keeping records cannot be over-stated.
Loss of profit
A builder is entitled to reimbursement of loss of profit (unless specifically excluded by the contract or at law) if he can prove that he was prevented from earning profit elsewhere.
There is no doubt under English law that the builder is entitled to relief, by way of additional cost, for the cost of financing the delay and disruption cost not paid by the buyer at the time the delay and disruption occurred. In his judgment in F G Minter Ltd v Welsh Health Technical Services Organisation (1980), Stephenson L J. said:
“It is further agreed that in the building and construction industry the ‘cash flow’ is vital to the Contractor and delay in paying him for the work he does naturally results in the ordinary course of things in his being short of working capital, having to borrow capital to pay wages and hire charges and locking up in plant, labour and materials capital which he would have invested elsewhere. The loss of the interest which he has to pay on the capital he is forced to borrow and on the capital which he is not free to invest would be recoverable for the Employer’s breach of contract within the first rule in Hadley v Baxendale (1854).”
In the case of Rees and Kirby Limited v Swansea City Council (1985),the Court of Appeal confirmed that financing costs were a recoverable head of loss and expense and stated such costs shall be calculated at compound interest, with periodic rests taken into account.
If a fixed price project is delayed, the builder may be able to establish the additional cost of inflation if there is for instance a steel price adjustment clause in contract. If identifiable costs increase, e.g. steel prices, the calculation is simple; it is the increased cost of that activity carried out after the increase in cost. Clearly allowance has to be made for the increase in costs which would have in any event been incurred by the builder.
Disruption (or lost productivity) costs
One of the most difficult items to evaluate with any accuracy is disruption. The problem is usually caused by a lack of accurate records.
Disruption is not delay in itself but may contribute and lead to a delay to completion of the vessel. Alternatively the disruptive event could lead to a delay to a non-critical programme activity. Disruption is the reduction in labour of plant efficiency which results in an increased cost for a given element of work. It is a loss of productivity, hindrance, disturbance or interference to the builder’s normal planned working method.
One of the most popular methods of evaluating disruption is the ‘measured mile’ basis. The measured mile approach compares different periods of productivity within a project, for instance welding efficiency during a period of disruption caused by the buyer as opposed to the efficiency when there are no limiting factors on efficiency of the workforce. Hopefully, by comparing the two levels of efficiency it will demonstrate that the level dropped during disruption.
Acceleration costs are usually comprised of overtime payments, target bonuses, additional labour and plant resources.
There are two main reasons why a builder may accelerate:
the buyer wants his vessel on time notwithstanding permissible delays, and orders or agrees acceleration measures
the builder is running late and decides unilaterally to accelerate.
Many contracts make no provision for buyers to order acceleration. It is then for the parties to agree. The acceleration agreement in these circumstances is likely to be construed as a separate contract and not necessarily subject to the terms and conditions of the original contract.
This occurs if the builder is entitled to an extension of time, but the buyer has failed to award extensions of time through not applying his mind properly to the matter at all, resulting in the buyer putting himself in breach of contract.
This situation places the builder in a dilemma he will himself be in breach if he finishes late; in short, due to the buyer’s failure, the builder is being forced to accelerate to avoid being in breach. The buyer’s failure gives rise to a claim for ‘constructive acceleration’ damages, but there are two major obstacles for the builder to negotiate. The first is establishing a breach by the buyer (simply making an error is not a breach), and the second is satisfying the requirements for causation and remoteness applying to damages claims.
In Motherwell Bridge v Micafil (2002), Micafil failed to grant an appropriate Extension of Time and Motherwell Bridge was entitled to be paid the acceleration costs. The Court held that Motherwell were entitled to recover additional costs and it was entirely reasonable for them to take the actions they did to keep to the time schedule imposed with no relief from the buyer.
The Motherwell Bridge case established English law precedent for ‘constructive acceleration’ claims where a buyer is not awarding the builder the appropriate Extension of Time and the builder accelerates his work even though he would be entitled under the contract to additional time and money. The accelerative measures taken by the builders will generally be less expensive to the buyer than the retained on-going site yard overhead costs and are in that sense viewed as constructive.